Lessons from a Failed Startup

“We all come with a finite amount of energy and a finite amount of time on this planet — use it wisely”

13 things I learnt from my startup experience:

1. Ground reality rarely matches your original business plan
2. Time will warp (not fly) when you get into the thick of things
3. Keep an eye for the rotten apple in operations
4. Taking on & running another business like yours is not an apples to apples take over
5. Put Family first — always
6. Don’t expect sweat equity in exchange for a sleeping partners non-commitment
7. Keep transactions as digital as possible — keep cash to the minimum — physical cash is a liability and a hassle
8. Operate Ethically — even if it hurts
9. Do not go solo — have a safety net in place for operations to continue in your absence
10. When in doubt, get the argument or agreement signed on a piece of paper
11. Don’t disclose your ideas to anyone and everyone, without a NDA
12. Decision once taken should not be debated endlessly if things do not turn out as expected — avoid Analysis-Paralysis
13. Never break trust of your fellow co-founding team. Trust is the foundation for long term health, wealth, happiness and synergy.

Here it goes:

I wanted to provide Organic Milk to my 4 year old daughter when there was no supplier willing to deliver fresh milk at my doorstep at 6 AM in the morning… this was the genesis of our startup. It was an idea built to operate on scale, with razor thin margins that will eventually help me quit my AVP titled job. IT is easy money — trust me.

Me and a couple of my friends were gung-ho on the idea that will revolutionise last mile delivery in the city of Bangalore. This was in June of 2016. The journey since then has been both rewarding and taxing. After almost 3+ years of sustained operations… we decided to pull the plug in September 2019.

The next few minutes will take you thru a ring side view of how a last mile delivery startup was setup, worked well, and what goes in the life of a founding member of a business.

We decided to do take up distributorship of an Organic Milk brand — after all… everyone wanted fresh organic (A2 was even a crazier fad) milk delivered to their door step early AM. We decided to prop up the ARPU with “fat margin” ancillary products that can be clubbed alongside morning orders, like exotic soaps, baked to order breads, dosa batter etc. Milk was the foot in the door opportunity — it is like a utility company — set once — and feed on forever… a cash cow, literally. Milk business is perhaps one of the biggest cash flow generating organised system in India. Think of the top 10 things in your fridge — I bet 6 out of the 10 have a milk component. (skimmed milk, powdered milk, low fat milk, ice creams, cheese, butter, shakes…list is endless)

Our Journey started with we meeting up with an established Brand owner, taking their views on picking up distribution for East, South East and possibly Mid / Mid West Bangalore. The business potential was eye popping. The numbers were mind boggling. Market was fragmented with no organised player — with a lot of small doodhwallas operating in their own area. We wanted to aggregate the unaggregated, we wanted to operate at scale.

Lesson#1: Business plans rarely match the ground reality. Keep a baseline of what you planned and then compare it to your current plan — you will be astonished how different costs, that you did not even know — exist and they eat up a big share of your operating margins. Having said that, you will end up getting a fairly good idea within 18–20 months of where the levers are to squeeze on for increasing the cash at bank.

Our model for the end customer was simple — subscribe with a default volume, add money to your wallet and volia! — milk will be at your doorstep with any other subscribed products the first thing you get up. Order by 8 PM, and items are at your door by 6 AM.

What went behind the scenes was at 8 PM the orders were frozen, SMS with order details were sent to the vendors, items were delivered at our depot between 11 PM and 2AM, our supervisors and delivery boys sorted the orders at 3 AM to 4 AM, they went about doing their rounds from 430 AM onwards till 7 AM — after that- everyone went to their day jobs. It was a win-win for everyone. In layman terms, we were pure traders. We employed part timers — it was easy to get someone to work for 6,000 INR for a 3 hour work, especially when we are providing the infra like bikes, fuel, jackets, mobile phones etc.

Lesson#2: Don’t underestimate the amount of time you will be investing away from your schedule towards setting up the whole system. Be prepared for the actual to be 50X of your estimate.

We took a small rental shack (which we called our Depot) at a place that was easy to get the stock dropped off to and was a ready to service depot for our immediate area of operations. The guy who had a shop near the depot sent us a boy who appeared to be an honest man- we made him our depot supervisor. Eventually we were 4 partners in the firm, with a delivery team of 18 boys, 2 supervisors, 1 mechanic, 1 customer support agent based out of Goa — since no one wanted to do customer care for the cost we were willing to absorb in a high cost city like Bangalore. We thought of employing college students — but they rarely get up at 530 AM to take calls. We thought of employing housewives or ladies who are on a temp break in their careers — that also did not go well, since ladies are often the most busy between 6 AM to 8 AM, often called “The Golden Hour”. Eventually… The firm was registered, Tax registration formalities done, bank account opened and the cash flow started… our growth chart was literally off to a flying start. We doubled, tripled our revenue in a matter of months, before we knew — we were doing a top line of 1,300,000+ per month.

Lesson#3: Early on growth numbers are exciting to look at, the straight line will turn into a higher upward growth, then you will enter a period of slowdown (people prefer to call it de-growth instead of loosing the market share — trust me — this is the time when you are having someone overtake you — from the blind zone.), fun part is you will not realise when the law of large numbers takes over. Keep on calibrating your business plan and forecasts almost fortnightly.

I took up customer care for the first 4 months since I had taken up the phone from a nearby phonewalla center on my name — timings were from 5:30 AM till 8 AM, every day. My respect for customer support has increased tremendously since I’ve done that. I salute the folks who are day in day out talking to frustrated customers without loosing calm over a recorded call, often for no fault of theirs.

Our vendors were so happy with our “Trust and Performance” that they decided to “offer” us a chance to take a business from someone who had decided to shut shop. We fell for it. This was the distribution for a highly lucrative up-scale 4000+ unit society in the middle of the IT corridor — it was a no brainer. Little did we realise that the customers in that area were on a post paid model instead of a pre paid. The outstanding liabilities were more than our cash flow for 2 months. Putting in time and effort to recover those bills itself will need a new process to be implemented — and the next month billing is also due. I took help of a few of my friends to develop invoice generation and backlog payment reconciliation modules to be integrated into our exiting platform for a “smoother cutover” — a utopian dream.

Sales, Billing, Delivery, Finance, Recovery, Operations — all are disjoint functions of any enterprise. Only God knows how to reconcile all of them into a single value of Truth. Throw in an acquisition and you are swimming neck deep in waters infested with snakes, sharks, crocks and the famous leopard who strikes from the top. We began to write off unreconcilable amounts — those numbers eventually became a report at the end of the month for our Finance. Everything can be brought down to a number — that is the beauty and irony of running a business. Dimensionality reduction is a given when making choices. The first dimension or the top most dimension is cost. Euphoria around the take over mellowed down and the scale of new operations began to sink in. We consolidated depots, rationalised operations for synergy, optimised the routes, laid off a few employees, since we had staff of our own who were willing to do the extra mile for a few bucks.

Lesson#4: When taking on a an incumbent, a proper due diligence is a must, while the top line addition may look rosy, operational integrations, especially around billing cycles, product discounts and customer expectations need to be carefully assessed before taking on. Anything that seems too good to be true — is in fact too good to be true. Prepare for backbreaking integrations, new process setups and hard labour negotiations.

Nothing stops a person from deciding not to turn up to your workplace the next morning — the labour laws are toothless — they are for worker protection. Be prepared with a backup of a backup of a backup.

Life goes on…. that’s why it is called Life…

Getting up at 3 AM became a norm… to ensure the supervisor wakes up and starts processing the delivery manifest — and eventually start handing out orders to the delivery boys respectively. The depot printer decided not to work a few times at 3 AM — I had a printer at home, thankfully. There were bike breakdowns at 4 AM — I had to drive to the depot, take the spare bike along with another boy and hand over the bikes — come back home… take a short nap — and be ready to talk politely to a groggy customer whose delivery had not happened — while my kid is about to wake up and to be made ready for school, it was an endless cycle.

As an entrepreneur — we often put our idea ahead of our family — especially in the early on days — when we are still in the honeymoon period (with the idea). The costs of that is irrecoverable in later months (on the family side).

Lesson#5: Act on the guilt of missing out on important occasions, don’t shrug off the guilt. Take time off from the schedule — hell will not break loose if you don’t work for a few days.

While all this was happening, I ended up designing the process for taking daily orders, perform debits into ledgers of respective customers — we began using google sheets just to “test the waters” — our last setup before we shut was a cloud hosted secure web services oriented web app powered by 8 databases with daily backups, integration with payment gateway vendors, reconciliations for failed payments, vendor order uploads, established process for payroll of 20 people, 15 bikes, 2 chillers, a few mobile phone connections, a bank account, uncleared vendor bills, unsold stock, unusable bikes, a laser printer, attendance systems, burnt out computers etc. The cost of doing business and making a decent profit is not easy. Sometimes I think most of the organisations in the world have a single agenda — to keep humanity engaged in some fruitful work… don’t worry about profits; they will be taken care of by the tax sops being offered by the authorities. With a high cashflow, your tax obligations and audit needs need to be factored into the opex — everything is a cost.

Lesson#6: ROCE is a very good term that is often used to measure the efficiency of an enterprise…sadly no indicator in ROCE considers the inhumane effort of time and energy. Something akin to sweat equity… only to realise that the sweat has either evaporated or been washed off down the drain — into the sewers. I wonder if we can ever make a ROCEHuman type indicator — the numbers it will tell will be mind bending.

Ok… so… continuing on… We put in processes, tested them for a few weeks, and then… automated them — to save time and effort. CI/CD was the norm. Each week there was some automation being done. I was handling the IT and a bit of Operations — so… the only time I got to invest in improvements and enhancements was between 9 PM and 1 AM — outside of my day job. Every day. A Wish list backlog began to balloon. We segregated must haves from nice to haves — still the list grew… any ways… operations continued — we were on a roll. 3 of us used to place soft bets — on what will be the volumes for tomorrow — I must confess my guesstimates were the most accurate — I was already dabbling with time series forecasting with google tensorflow by then.

In the beginning we used to disburse salary in cash to the boys — the process was set — we get the attendance, we do the maths on a google sheet, come up with a final number, I write a cheque — the supervisor takes the cheque to the bank, and disburses the salary the next day. This setup went on smoothly for 14 months, until one day — the supervisor came in, took the cheque, en-cashed it and did not turn up the next day to disburse salary — he was the “appeared to be honest” man we had employed. Some lessons are learnt the hard way. Thereafter, we did NEFT transfers to all staff — it was cumbersome, needed OTPs, and manual updates to a master sheet; we could not process the entire payroll in one sitting — often done after 10 PM at night, after kids have gone to sleep. The cash flow continued, we could take the hit and continue the operations as if nothing happened, we just delayed capex on a new items by a few weeks.

Lesson#7: Don’t trust a person with your business’ cash. Keep the transactions as digital as possible.

Few months down the line, one of the boys — who apparently was a well connected local goon, decided to tell us that the bike has been stolen, and we will be provided with a FIR from the local police station for the lost bike. He too decided to not turn up to work one fine morning. He started to form a union to protect the interests of other boys. We were already offering salaries a triple the market rate for such work — as such, his arguments did not hold water and he eventually got fired taking along his well wishers, just to show us how he can impact us — and boy… he did leave us in tatters. Deliveries got impacted. We pulled in cash from the opex and purchased a bikes, hired a few boys and restarted the operations in the hit areas in under 7 days — we were super happy with our performance and the ability to rise from the ashes… little did we know that the customers had already made a subconscious choice to switch over to a new entrant since they were being offered 10 Litres of free milk if they top up with 5000 Rupees into their wallet and they will also get a 5% cash back. We were one of Paytms’ earliest batch of offline QR code business partners to go live. This was the golden era of cash backs — we were already digital when de-mo happened; that event hit a lot of people very hard — especially those who were dependant on cash for their weekly needs. I could see the struggle on a particular strata of economy, it is heart wrenching when you recall that your fellow workers have been thrown under the bus — while they look up to you for assistance, even though you are not at fault. Our cash flows continued, salary advances were given to a few who needed it the most. On the other side… Some of our customers said , I have 25,000 lying with me in 500 Rupee notes — please credit my wallet — take 10% fees but please do it. We did not entertain any of such requests.

Lesson#8: As a business and as an individual… never compromise on your Integrity and Ethics. The temptation is difficult to resist, but you will be happy about making the right choice. Ethics is like Karma — it comes back with interest.

At the competition side… we were up against a fragmented unit of opponents — who we had to pacify and some times cede to — in order to operate in the zone. There were times when we did not know who was on our side and who was working for others by wilfully delivering partial or wrong orders for our top spending customers.

As a founding team, it is of outmost importance to be in sync. Sync in the beginning is very different from the tunes you will dance to in a few months time during the life of a startup. As with any startup that is witnessing growth beyond its capacity, it is but natural for each of the partner to have a vision that will transform the whole game — put us into the major league — separate us from the scouts… but then — each partner has their own prioritised vision and friction begins to show up! investment vs time vs capacity vs effort vs sincerity starts getting questioned and the group starts to splinter on topics — as a whole the unit still remains one — but not for long. A few partners turn into sleeping partners — they are available when needed, but are not actively involved, even more questions get asked about load balancing. Frustration often gets vented over private phone calls between two people and sides being to be formed. The side that has a better grip on operations eventually gets the better off others — since they know the numbers that no one can challenge them on.

Lesson#9: Avoid starting a business/new venture with an immediate family member, one of the relationship will cease to exist — for sure. Also, do not go solo — you will have unforeseen circumstances popping up all along the journey — and you will need others to step in and take on ad-hoc roles.

I am reminded of a candid situation where in the Sales team is unable to sell, due to no marketing budgets and a crappy system, the vendors are frustrated that we are unable to increase sales even though we are offering prioritised pricing and benefits, making them think to list the products on other platforms for a wider audience, the IT folks are always under pressure to sway the magic wand that will automate everything, the finance guys are always asked for more capex and even more opex, the staff always wants a hike, opex just keeps on increasing that makes inflation look like a puppy!, during all this commotion the customer support team tries its best to keep the face of the company while the customer is getting frustrated and thinking… just one last time… after this I am giving up on these hopeless bunch of jokers who don’t know how to even light a matchstick.

We started off as an exclusive distribution partner for the brand — but never got it added in a registered document — as such the vendor listed products on competing platforms and VC backed newbies were happy to take away our customers with freebies offered. We began to bleed — but only by minor cuts — little did we know — that a death by a thousand cuts comes unnoticed and by the time you realise what has happened — it is too late to recover — the will to survive is just not there. The cracks within the founding team are wider and run deep by then.

Lesson#10: Before commencing a trading or distribution business, get in writing exclusivity and territories alongside margins and volume based pricing discounts. Don’t tie the margins to product MRP revisions — it will not work.

Distribution as a business is a highly controlled setup with prices and territories clearly marked out. Everyone knows who is where and what their capability is. Some of the best brands you can think of — have a tightly coupled and finely tuned distribution setup — often being run by one of their own sister concerns. Some of the biggest economies of today — exist because of trucks.

You need to always… always get your priorities right — be clear what will pay for the house loan, kid’s school fees and your expenses. As often with a fresh startup, debt as an option to finance operations is debated hotly. VC money is easy money — which in the longer run turns out to be very costly, if your VC ends up exiting to another VC. So… it is always a catch 22 — Debt or Equity?

I think… once you get funded… the real question beckons: “Dude… we have the money… now what?”

I contacted my other entrepreneur friends and took their guidance on how to make a “pitch deck” — see where your model breaks, give wild numbers, VCs love wild numbers man! Eventually we got a chance to go to Mumbai and pitch ourselves to a VC firm. We prepared our deck, it underwent multiple reviews by uncles, friends of friends, we were ready with a version #24 Final Final Copy… finally. We did not sign a NDA with VC firm before meeting them, I guess we were too pent up and excited about pitching and discussing and role plays and who will say what — that cost us dearly. Our SWOT slide had pitched us squarely in a sweet spot space that neither big sharks nor the new VC funded businesses were offering. Looks like we gave it away on a platter, nicely arranged with organics on top.

Within 8 months — 3 new firms propped up in the markets (and cities as per our growth plans respectively) on exactly the same business model as ours — and they were backed by VC cash — ready to burn and burn till the last one to bleed… wins. The word spreads quietly, but rapidly in the VC world when the growth numbers being shown are in excess of 10% month on month with a 10%+ profit margin.

Lesson#11: Do not give out a hint or sniff of your idea to an investor without a NDA.

In hindsight, I think we did a coup of all sorts… we ended up having VC houses fund 3 startups — 1 has ceased operations last week, 1 is on the brink and 1 more will founder in next 6–8 months. Rough ballpark of the capital at risk is about $ 20–35 Million at across investors. Looks like most of them are/were just feeding off the cash flow and had no clue about the rate of risk being built up. I call it the sink hole. Here comes the killer — last mile delivery business model comes with a glass ceiling — you cannot achieve scale without a corresponding linear investment in your capabilities. The “hockey stick curve” (when revenues grow at a faster pace than costs) that everyone is after — will not happen — since your assets on ground are time bound and constrained by space. You can achieve a scale of 50% or 70% — but then you hit the ceiling — you need another truck, another bike, another boy — all of who come with constraints — and not to mention backups to sustain operations. It is after all a Human at the other end rendering a service. It is no surprise that today the most scalable models are powered by energy, cloud and data — they can scale to unprecedented heights — human is now a roadblock in achieving scale. Throw in Machine Intelligence and you have a powerful setup — I will be soon releasing another article on that front.

Lesson#12: You never now how things will turn out in the near future — your journey will take you via so many junctures with so many choices — all you can do is… decide either left or right, but once you have made the choice — go ahead with it. Do not get bogged down with Analysis — Paralysis.

So… how did it all fall apart? Seems like we were doing well… cash flow was on, salaries were getting paid, systems were working.

The economic capital a person is supposed to get out of their time is limited to the hours they invest (read the opening of this article) , and when one starts to see that the ratio of time invested to the economic potential is not in line with what was envisaged — the beginning of end has commenced — it all starts with a customer call going unanswered, a database backup not being taken, a failed payment not being investigated, a product invoice not being paid, a broken asset not being repaired, a sales event being booked but attended to, a brochure not getting updated and old one with wrong numbers being sent, a marketing campaign not properly thought or a campaign thought thru excellently but poorly executed, an email not getting responded to in time (the sink hole is bigger than the firms capacity now), eventually… someone else fulfils the need for the customer. Think what do you do as a customer when your favourite ride hailing app does not book a cab — without blinking you switch over to the other aggregator.

That gets me to another subtle (Hidden Lesson# 14) learning: Customer loyalty or brand affinity does not exist in today’s world. The customer is and will always be willing to switch over at the slightest of provocation or business issue to someone else, and they do it quietly — even without you getting a know of the undercurrents — till you have been swept away to a corner.

The Final straw? — When a partner / vendor who promises to give you an area exclusively, starts to market their product (and a soon to be rolled out service) in your area without your knowledge. Again… an Issue of Ethics. Think of it from the Vendor’s point of view — they want the products out of their warehouse at the earliest.

Distributor loyalty is also a thing of past — A Vendor is loyal only to the market — not the ecosystem that enables their product to reach the market. A vendor is always sniffing around for a better, cheaper, faster way to market their product — directly to a consumer. Margin is everything. Last Mile delivery is a challenge that takes very little to setup, but deep pockets to sustain operations, even deeper commitment from team members to operate.

Out of the 4 founding partners, 2 were practically full time into the whole setup, while other 2 were supporting it while their day jobs were also there. The way I see it — if the team begins to squabble, being full time or part time does not matter — it is just an eventuality.

Lesson#13: Trust above everything else is the key to a team’s continuing and achieving greatness together.

As you can see, the learnings have been immense — but the failure does leaves you thinking. There comes a time when we need to reflect, digest, discard, and be ready for the next adventure…. It is called “Fallow Time”.

I’m sure there will be equally interesting 3 other views — each of them correct in their own way — I think we should do a Vantage Point like story.

Cheers!